The random thoughts of an Australian economist and author, who has seen much of the world and wants to change it.

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Why Are Wages Stagnant?

Governments around the world have been throwing money at their economies in an effort to accelerate inflation. Unemployment rates in the USA, Australia and elsewhere have been falling. And yet real wages have been stagnant for decades.

Well, let me qualify that last statement. Average wages have been stagnant. Some people’s wages have soared while some others’ have gone backwards.

So what’s going on? I have several theories, which are not mutually exclusive:

Inflation happens when supply is inelastic in response to demand. But for many things that we buy nowadays supply is very elastic indeed. Think about software, on-line entertainment, information, e-books (subliminal ad: Buy my books! Buy my books!), pharmaceuticals and other hi-tech products that cost heaps to develop but very little to replicate. (Conversely, inflationary efforts have been spectacularly successful in real estate markets.)

Consumers are still enjoying the benefits of shifting manufacturing from high-cost countries to low-cost countries. That process will continue for some time as China takes its turn at outsourcing low-skilled and/or high-polluting processes to poorer countries.

Outsourcing of services is in its infancy. We’re used to dealing with call centres and tele-scammers in low-wage places, but there’s still a long way to go in back-room financial and legal services, technical support, marketing, R&D…

There’s another kind of outsourcing too: to customers, who work for nothing. It’s most obvious in supermarkets, where we’re encouraged to scan and bag our own groceries. And have you ever tried to get technical help online from Microsoft? They refer you to other customers who may have worked out the solution to your problem

‘Uberisation’ has entered the lexicon. Transmogrifying people from employees to self-employed contractors is one thread in a weave of digital platforms, casualisation, zero-hours contracts and exploitation of immigrants working illegally** which all tend towards erosion of wages.

Social policies and compliance requirements that discourage taking on staff. Outsourcing to a contractor, without inquiring about their employment practices, is safer and generally cheaper.

Six theories. Any more?

** I have in mind foreign students in Australia, who are allowed to work 20 hours per week but have been found working much longer hours for 20 hours’ pay. Their employers tend to be franchisees, who claim that the onerous terms of their franchises don’t allow them to pay legal wages. The franchisors hold up their hands in horror: “How terrible! We deplore this! We didn’t know!”